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W ORK I N G P A P E R
Is the OECD Model Suitable for Strategic
Public Enterprises in Terms of National Development? Reflections from CODELCO Case, Chile
Francisco CASTAÑEDA, Diego BARRÍA & Germán ASTORGA
CIRIEC N° 2015/18
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3
Is the OECD Model Suitable for Strategic Public Enterprises
in Terms of National Development?
Reflections from CODELCO Case, Chile*
Francisco Castañeda, Diego Barría2, Germán Astorga3
Working paper CIRIEC N° 2015/18
* This article contains some sections based on Barría (2015). However, their focus, much of
the evidence and reflections presented correspond to an in-depth version, which is based on a
presentation at the XIV Milan European Economy Workshop “Major Public Enterprises in a
global perspective”, University of Milan, June 25-26, 2015, Research Project of CIRIEC’s
International Scientific Commission on Public Services/Public Enterprises. Universidad de Santiago de Chile (Email: francisco.castaneda@usach.cl).
2 Universidad de Santiago de Chile (Email: diego.barria@usach.cl).
3 Universidad de Santiago de Chile (Email: germanastorgavivanco@gmail.com).
.
4
Abstract
This academic work address about the Chilean state owned company (CODELCO)
and how it deals with the recommendations of OECD in order to define determined
corporate governance. The core of this work is based on establishing a critic analysis
to these guidelines.
In the last decades, state owned companies (SOEs) have returned to play a visible role
in world economies. The privatization wave experienced by the world, with different
intensities depending on the region since the 1970s, was not successful and weakened
the extent of intervention of SOEs across economics. Large enterprises survived and in
recent years, for example in Latin America, a new phenomenon has emerged: the
renationalisation of enterprises previously privatized.
This is even evident in economies like Chile, in which between 1970s and 1990s, many
of the then SOEs were privatized. Enterprises that remain in the hands of the Chilean
State have been managed, increasingly, under a total private logic, inspired by notions
of corporate governance of the OECD. However, a SOE, CODELCO (National
Copper Corporation of Chile), one of the largest state-owned copper enterprises in the
world, has not fully entered into that scheme. Both the Pinochet dictatorship (1973-
1990) and the later democratic governments have considered CODELCO as strategic,
due to its contribution to the national budget.
Key-words: State owned enterprise (SOE), Performance, OECD Guidelines,
Corporate Governance, National Budget.
JEL-Codes: L2, L3, O1
5
Introduction
The public enterprise has returned to play a visible role in world economies. The
privatization wave experienced by the world, with different intensities
depending on the region since the 1970s, failed in eliminating state enterprises
control from the economic sphere. Large enterprises survived and in recent
years, for example in Latin America, a new phenomenon has emerged: the
renationalisation of enterprises previously privatized (see, for example, Serrani,
2013).
In the academic sphere, a renewed interest is also seen to study public
enterprises. A brief review of major international journals such as Annals of
Public and Cooperative Economics accounts for this. Latin America is not far
behind (Chavez and Torres, 2013; Guajardo and Labrador, 2014). As Guajardo
(2013) points out, the public enterprise is a Leviathan that refuses to disappear.
This is even evident in economies like Chile, in which between 1970s and
1990s, many of the then state-owned enterprises (Barría, 2015) were privatized.
Enterprises that remain in the hands of the Chilean State have been managed,
increasingly, under a private logic, inspired by notions of corporate governance
of the OECD. However, an enterprise, CODELCO (National Copper
Corporation of Chile by its acronym in Spanish), one of the largest state-owned
copper enterprises in the world, has not fully entered into that scheme. Both the
Pinochet dictatorship (1973-1990) and the subsequent democratic governments
have considered CODELCO as strategic, mainly by the amount of resources it
provides to the treasury. This document is twofold. On the one hand, to
characterize CODELCO to subsequently discuss whether it is appropriate that
this enterprise fits all "best practices" that the OECD has identified for SOEs.
Public Enterprises in the History of Chile
The early history of the independent public enterprises in Chile can be traced
back to the second half of the nineteenth century, a period in which the State had
to retake railways projects abandoned by private companies (see Crowther,
1973; Alliende, 2001; Guajardo, 2007). This activity will take place during the
first decades of the twentieth century, especially in the mining sector (Ibañez,
2003), but it will have its peak with the establishment of the Creation and
Development Corporation (CORFO for its acronym in Spanish), in 1939 (see
Ortega et al., 1989; Correa et al., 2001; Ibanez, 2003; Silva, 2008).
CORFO was created after the earthquake of Chillán city of that year and came to
undertake the Chilean version of ISI (development strategy based on import
substitution). The corporation was conceived as a public agency responsible for
establishing economic development plans, acting as an entrepreneur and
providing subsidies to private (Fermandois, 2005). During the presidency of
Eduardo Frei Montalva (1964-1970), a process of nationalization (Chilenization)
of copper deposits, which involved purchasing shares of copper companies to
6
make the State the majority shareholder. During the government of Salvador
Allende and the Unidad Popular (Popular Unity) (1970-1973), the process ended
with the complete acquisition of the enterprise in 1971. In addition, progress was
made in shaping a social area in the economy: a group of enterprises, until that
moment private, became state-run (Ortega et al., 1989). This process is
materialized in a de facto takeover by the workers which reached such a pace
that 70% of industrial property came under the social sector (Arellano, 1984:
44).
However, the social area and the state enterprise as relevant actor had an end
with the coup carried out by the military to overthrow president Salvador
Allende. The military dictatorship of Augusto Pinochet (1973-1990) introduced
what Manuel Garate (2010) has called a capitalist revolution, characterized by
the implementation of a neoliberal economic model, with minimal state
involvement in the provision of social services, and a pro-business legislation
that, among other things, has inhibited the emergence of unions as important
actors (Frank, 2000).
In the field of public enterprises, a first measure taken by Pinochet and the
Chicago Boys (group of monetarist economists trained at the University of
Chicago), was to return to the private sector the enterprises that have gone
social. This first phase also included, among other things, the creation of the
private pension system (dominated by the Pension Fund Administrators, AFPs)
(Saez, 1996). Between 1985 and 1988 a second wave of privatization was
developed. It was highly controversial because several managers in charge of
developing the process ended up being the owners of these enterprises
(Monckeberg, 2001).
There were enterprises in this package that were created under the umbrella of
CORFO fulfilling roles of public service providers (Telephone Enterprise of
Chile, CTC; The National Airline, LAN Chile; the National
Telecommunications Enterprise, ENTEL; the Chilean Electricity Enterprise,
Chilectra) and production inputs for industry (ENDESA, CAP and Sociedad
Quimica y Minera de Chile, SOQUIMICH). The State Bank, CODELCO and
ENAP continued in state hands, being considered strategic enterprises (Garate,
2010).
In the 1990s, under the governments of the coalition called Concertación, a
center-left coalition that replaced Pinochet, held a third wave of privatization,
which covered water enterprises owned by the state and also the Port Enterprise
of Chile which it was divided in ten enterprises, seven of which granted port
management to the private sector. Instead of promoting the development of the
public enterprise, which has prevailed has been the conception of a Subsidiary
State, characterized by the dominant role of private actors in meeting social
needs (see, for example, Bravo Lira, 1995).
7
Table 1: Enterprises of the State of Chile (2013)
Name Year
established
Type of legal
entity
Percentage
of state
property
Transfers to the
Treasury in 2012
by surplus and
taxes
Astilleros y Maestranzas
de La Armada 1895 Under Public Law 100 0
Banco del Estado 1952 Under Public Law 100 264,775,605
Casa de Moneda de Chile
S.A. 1749
Public Limited
Company 100 957,132
Cimm (Centro de
Investigación Minera y
Metalúrgica)
No
information
available
No information
available
No
information
available
No
information
available
Cimm Tecnologías y
Servicios S.A.
No
information
available
No information
available
No
information
available
No
information
available
Comercializadora de
Trigo S.A.
1986
(in its current
form)
Public Limited
Company 97,24 0
Corporación Nacional del
Cobre de Chile 1976 Under Public Law 100 3,763,872,614
Empresa Concesionaria
de Servicios Sanitarios
S.A.
1990 Public Limited
Company 100 255,235
Empresa de
Abastecimiento de Zonas
Aisladas
1960-2013 Under Public Law 100 0
Empresa de Correos de
Chile
1858
(in 1981 it
obtains its
current form)
Under Public Law 100 0
Empresa de los
Ferrocarriles del Estado 1884 Under Public Law 100 0
Empresa de Servicios
Sanitarios Lago Peñuelas
S.A.
1998 Public Limited
Company 98,67 36.738
Empresa de Transporte de
Pasajeros Metro S.A.
1989
(in its current
form)
Public Limited
Company 100 0
Empresa Nacional de
Aeronáutica 1984 Under Public Law 100 0
Empresa Nacional de
Minería 1960 Under Public Law 100 35,408,086
Empresa Nacional del
Carbón S.A.
1921
2012 sales of
assets to
close down
Public Limited
Company 99,97 0
Empresa Nacional del
Petróleo 1945 Under Public Law 100 5,926,484
Empresa Portuaria
Antofagasta 1997 Under Public Law 100 22,118,452
Empresa Portuaria Arica 1997 Under Public Law 100 966,800
Empresa Portuaria Austral 1997 Under Public Law 100 1,370,922
8
Empresa Portuaria
Chacabuco 1997 Under Public Law 100 1,214,300
Empresa Portuaria
Coquimbo 1997 Under Public Law 100 2,621,961
Empresa Portuaria
Iquique 1997 Under Public Law 100 6,705,725
Empresa Portuaria Puerto
Montt 1997 Under Public Law 100 3,600,363
Empresa Portuaria San
Antonio 1997 Under Public Law 100 40,638,474
Empresa Portuaria
Talcahuano San Vicente 1997 Under Public Law 100 46,126,032
Empresa Portuaria
Valparaíso 1997 Under Public Law 100 10,605,796
Fábrica y Maestranzas del
Ejército 1953 Under Public Law 100 0
Polla Chilena de
Beneficencia S.A.
1934
1990 pasa a
sr S.A.
Public Limited
Company 100 864,319
Puerto Madero
Impresores S.A. 2004
Public Limited
Company 69,3 0
Sociedad Agrícola
SACOR Ltda.
1964
(en
liquidación
2013)
Limited Liability
Company 99 0
Sociedad Agrícola y
Servicios Isla de Pascua
Ltda.
1980 Limited Liability
Company
99,93
(0,07 a través
de SACOR)
0
Televisión Nacional de
Chile 197rl0 Under Public Law 100 1,568,149
Zona Franca de Iquique 1990
Public Limited
Company 71,27 251,368
Source: Compiled from information posted on official websites of the enterprises,
www.sepchile.cl, www.dipres.cl and www.bcentral.cl.
The contributions were converted to dollars from the exchange rate observed in
December 2012.
At present, the number of Chilean public enterprises is reduced. Table 1
summarizes the ones existing until today and shows that, except from
CODELCO, the importance of these organizations is reduced, in terms of
contribution to the public budget. As shown in the next section, the management
of these entities has followed an OECD-isation pattern, assimilation of the
recommendations of the OECD, except those defined by the military during the
1980s, as strategic.
9
Steps towards OECD-isation in terms of management of public enterprises
in Chile
Since the 2000s, the management of the Chilean public enterprises has been
debated. On the one hand, the issue of efficiency in terms of costs has been
discussed, something sensible for enterprises such as CODELCO. Similarly,
attention has been put into the setting up of the enterprise directors and the
difficult relationship between politics and technical expertise. Another important
issue in the debate was that of corruption4.
In fact, between the 1990s and 2000, several enterprises were subject of scandals
due to hefty price contracts or paying executives millions in compensation.
Consequently, a debate on how to improve the management came and eyes
pointed to the international debate on the subject, especially in regard to the
corporatization.
McDonald (2013: 59-60) has defined corporatization as the process in which
public organizations have responsibilities for the production of goods and
services, but they are treated as if they were independent institutions. The
creation of legal entities differentiated to the ones belonging to the State and that
act as if they were part of the private sphere is promoted. In this sense, the
existing discussion in the private sphere regarding agency problems in the
management of public enterprises was incorporated in the debate on public
management. In simple terms, the debate on corporate governance seeks to find
mechanisms that allow the management of the enterprise to be aligned and
sufficiently controlled by a higher body, the board, which must respond to the
interests of shareholders5.
In that vein, the Organization for Economic Cooperation and Development
(OECD for its acronym in English) has been successfully promoting,
particularly through its documents Guidelines on Corporate Governance of
State-Owned Assets (2004), Guidelines on Corporate Governance Enterprises of
State-Owned Enterprises (2005) and Corporate Governance of State-Owned
Enterprises: A Survey of OECD Countries (2005) (on this point, see Fontes
Filho, 2008).
The OECD (2005), following the logic of corporatization, proposes five
recommendations on how states should manage their enterprises. They are:
The legal and regulatory framework should be based on the principle of
level playing field between public and private enterprises.
4 The cases of corruption in state enterprises between 1998 and 2008 can be found in
http://www.cdh.uchile.cl/corrupcion/ 5 For a debate on corporate governance, see Gompers, Ishii and Metrick (2003), Guillain and
Starks (2003), Hart (1995), Morck, Shleifer and Vishny (1989), OECD (2004), Shleifer and
Vishny (1997) Vives (2000).
10
The state should have a clear property policy, to ensure corporate
governance based on transparency, accountability and professionalism.
The ownership policy should recognize the responsibilities that fall into its
jurisdiction to public enterprises in connection with stakeholders.
Public enterprises must maintain a high level of transparency, following the
OECD guidelines on corporate governance.
The corporate boards require authority, competence and objectivity, to
manage state enterprises.
Chilean public enterprises are controlled in their administration by three
schemes. The first is the direct administrative control carried out by the
President of the Republic through the relevant Ministry. CODELCO and ENAP
fit into this category, two enterprises which, as we have seen, play an important
role as a source of revenue for the Treasury. A second form of control is the
articulated management. Here, according to Camacho (2010), a common
rationality is imposed to a set of enterprises operating in different sectors. This
has been done through CORFO. Traditionally, the corporation has been divided
into committees that are in charge of different sectors. Until 1997, there was a
committee in charge of CORFO enterprises, which was replaced this year by the
Business Manager system. This committee functioned until 2001, when it was
replaced by the System of Public Enterprises, committee operating until today.
The vast majority of state enterprises are subject to this institutionality, except
from CODELCO, ENAP and TVN. A third type of control is that performed by
other enterprises. In this category are all those subsidiaries, which report to
major enterprises. An example is Geotermia, whose ownership corresponds
50.01% to CODELCO and 49.9% to ENAP (Camacho, 2010: 434-439).
So far, there have been two bills on the subject (the first in 2008 by President
Bachelet, and one in 2013 by President Piñera). What these initiatives have
sought is to align Chilean institutions to the scheme promoted by OECD. For
this, both governments have targeted four objectives:
To establish a common framework for state enterprises.
Differentiate entrepreneur State role from those of formulating and
executing of public policies.
Clarify business objectives.
Determine responsibilities for information and transparency.
11
Table 3: Draft laws on corporate governance for the State of Chile,
presented in 2008 and 2013
Goals Bachelet Project (2008) Piñera Project (2013)
Common institutional
framework for state
enterprises
Creation of the Higher Council for
Public Enterprises as a decentralized
public service and supervised by the
President of the Republic through the
Ministry of Finance.
In charge of representing the
Treasury, CORFO, companies or
shares in companies with state
participation.
Dictates guidelines of general
application within the enterprises
under their charge.
Appoints directors in state
enterprises.
Creation of the Public Enterprise
System (SEP for its acronym in
English) as a decentralized
public service and supervised by
the President of the Republic
through the Ministry of
Economy, Development and
Tourism.
Responsible for ensuring that
the management of state
enterprises may minimize costs,
maximize profitability and to
meet efficiently and effectively
the objectives or public purposes
established by law.
Appoints directors in state
enterprises
State differentiated roles
between employer and
formulator and executor
of public policies
Property rights companies are
delivered to the Council, fulfilling
the separation of functions.
Property rights on companies
are delivered to the system, thus
fulfilling the separation of
functions.
Expliciting companies’
objectives - The SEP must make a technical
report, at least every three years,
which should identify, among
other things, the achieved
objectives or public purposes,
and if they are achieved at
minimum cost.
Information and
transparency
The Board may require information
to companies and they are required to
provide them.
The Board shall report on
management to the President of the
Republic, companies that are
represented by the Board,
committees of the Senate and
Chamber of Deputies.
It must also meet and discuss
business development plans and
investment projects.
It should inform the Ministry of
Finance on budgetary matters.
The SEP must inform the
Ministry of Finance and
Economy, Development and
Tourism made annually on the
control on the management of
the company directors. This
report will also be sent to the
Special Joint Committee on
Budgets at the Congress.
Source: Compiled from bills available at sil.senado.cl/docsil/proy6216.doc and
http://www.camara.cl/pley/pley_detalle.aspx?prmID=9487&prmBL=9083-05 [15-01-
12
While sharing common ideas, such as applying the rules of private enterprises to
the state management, the projects have some differences. The Superior Council
of Public Enterprises was conceived as an institution within the Ministry of
Finance, while during Piñera’s government the Public Enterprise System is part
of the Ministry of Economy, Development and Tourism. This responds to a
difference in approach: in the first, the relationship between business and the
budget is emphasized, while the second treats the group of companies as market
players. There is also a difference in the composition of the Board. Bachelet
proposed to be nine members, seven appointed by the President of the Republic
and two by the President in agreement with the Senate. Piñera, on the contrary,
proposed a composition less dependent on the president and most diverse: one
appointed directly by the President, four appointed by the latter from a list
proposed by the Council of High Public Management, and four appointed by the
president in agreement with the Senate. Another difference lies in the fact that, as indicated in Table 3, the initiative
presented by Piñera gave a greater emphasis on having public service, along
with fulfilling the functions of representing the state, CORFO, Treasury and
stock orient globally the progress of the group of companies. This orientation is
clearly defined in many of the functions that the project delivers to the SEP,
including: 1) monitoring and continuous evaluation of company directors’
management; 2) the development of an annual plan for the whole group of
companies (Group SEP plan); 3) the review of annual plans made by the boards
of state enterprises; 4) the preparation of a technical report, at least every three
years, in which the achievements of State companies are reported;
5) introduction of performance agreements to align the remuneration of directors
with company results.
Similarly, there are differences in relation to exclusions from the system.
Bachelet proposed to leave outside the control of the SEP the following
companies: State Bank (Banco Estado), CODELCO, ENAP, ENAMI and TVN.
For its part, the national defence companies were left outside, but on the boards
of each of them there would be two directors appointed by the Council.
President Piñera, meanwhile, proposed to exclude the State Bank, CODELCO
and TVN, and include the rest of the companies to the system.
By January 2014, the project is under discussion in the Chamber of Deputies.
Bachelet’s second term, which begins on March 11 this year, will not mean a
change in this direction, because in her program this initiative is compromised.
Therefore, it is very likely that public companies start to be managed under a
corporate governance framework in line with OECD guidelines.
13
CODELCO, a strategic company for Chile
The beginnings of the massive exploitation of copper in Chile are associated
with the arrival, in the early twentieth century, of monetary capital from the
United States. Between 1904 and 1910, two companies, Branden Copper
Company and Chile Exploration Company, began the exploitation in the mines
of Chuquicamata and El Teniente, respectively. In the 1920s new American
actors such as Anaconda Copper Company and Kennecott Copper Corporation
(Vergara, 2015: 229) entered the arena.
During the 1950s a debate about the fact that this industry was in foreign hands
began. In 1951 the so-called Washington Agreement was signed, which allowed
the country had 20% of the production at its disposal. In 1955, the state created
the Copper Department, to conduct studies on production and sales, and to
exercise control in the industry. In the following years, steps will be taken
towards nationalization. In 1967, during the government of Eduardo Frei
Montalva (1964-1970), the law 16,425, of "Nationalization of copper" is
approved which allowed the state to control 51% of the most important deposits
in the country. In 1971 it goes a step further, during the presidency of Salvador
Allende (1970-1973), and through the law 17,450, the state happens to have full
control over the deposits of copper (see, eg, Correa et al. 2001).
In 1976, through the enactments 1,939 and 1,940, it was established an
institutionality capable to manage and exploit the deposits nationalized at the
time of Salvador Allende. The National Copper Corporation (CODELCO) was
established as a state enterprise, with legal personality and its own assets. The
company management is in the hands of a Board (CODELCO, 2015). It is
composed as follows:
CODELCO’s corporate governance is regulated by law 20,329. This regulation
came on a proposal by President Michelle Bachelet in his first term (2006-
2010), which sought to make some innovations to the ways of the enterprise was
managed. On the one hand, the proposal explicitly stated the desire of the
Executive to incorporate the OECD guidelines for the management of public
companies. The proposal considered CODELCO to be subject of the rules for
private companies (except in matters that were incompatible with the rules
established in 1976), established a mechanism for selecting the directory to
respond to eligibility criteria. Also it separated the functions between the board
and the CEO of the company. Currently, the board is composed of nine
members: three are appointed directly by the President, four were selected via
the System of High Public Management (the mechanism through which the most
senior public managers are selected) and two members nominated by workers’
associations (BCN, 2009).
At present, the company consists of eight production divisions: Radomiro
Tomic, Chuquicamata, Gabriela Mistral, Ministro Hales, Salvador, Andina,
14
Ventanas and El Teniente. Each of them has a high level of decentralized
management (CODELCO, 2015).
CODELCO is a major player in an economy like Chile, geared to international
trade and it is dependent on exports of raw materials (see Llorca, 2015). From
the 1960s until now, exports represented 21.1% of Chile’s GDP, reaching in
recent years to about 30%.
Figure 1: Evolution of Chilean exports as a percentage of GDP
Source: Rodríguez et al. (2015).
Within exports, corresponding to copper has a gravitating weight. In the period
2010-2014, they reached 54% of total exports. Of these, about a third of
production is for CODELCO.
Figure 2: Copper as part of Chilean exports
Source: Rodríguez et al. (2015).
15
Chile concentrates approximately 30% of world copper production. Specifically,
CODELCO represents almost 10% of world production. In other words, the
company is the largest producer in the world and also owns about 10% of world
reserves and 32% of Chile’s reserves. In fact, the reserves of the company
exceed that of countries such as Mexico and the United States (Cochilco, 2014).
Figure 3: Production of CODELCO as part of
the total Chilean copper production
Source: COCHILCO (2014).
CODELCO is not only the leader in the world in copper production, but also
plays a key role in tax collection. As shown in another study, the company plays
the role of generating revenue to the Treasury and, in fact, there is no other
company that delivers that amount of resources (see Table 1 of this paper and
Barria, 2015). They are derived from taxes on profits that every company must
pay (20%), a tax of 40% for public companies (Decree Law 2,398), along with a
variable payment of Royalty (between 5 and 14% law 20,469) and a 10% tax on
exports (Law 13,196). The following table shows these contributions as a
percentage of GDP.
16
Figure 4: Contributions of CODELCO to the Treasury as a percentage of GDP
Source: DIPRES (2014).
The importance of the copper industry for the economy and for the treasury
CODELCO makes highly relevant the budget formulation process. Since 2001,
Chile’s fiscal policy is based on a rule of structural adjustment, called Cyclically
Adjusted Balance (CAB). This rule seeks to set spending targets, which initially
involved a tax savings of 1% respect to a potential GDP of the economy. Today,
the goal is to reach 0%. Through this mechanism, the Chilean State is capable of
driving countercyclical fiscal policies, as demonstrated, for example, with
increased fiscal spending in 2009 in order to combat the global crisis last year
(DIPRES, 2015). In order to promote this fiscal policy a budget formulation process has been
developed seeking to adjust spending decisions to trends in the economy. To do
this, in a first stage, a committee of experts delivers projections on trend GDP
and copper long-term price. These estimates are added to those made by the
Ministry of Finance from prospective studies of levels of growth and tax
revenues (mining and non-mining). With information from both actors,
consolidated projections on GDP, the copper price and the structural fiscal
revenues are determined in order to establish the limits of public spending to
comply with the fiscal rule stated before. The BCA of a period is derived from
the difference of the accrued balance of the period t (BDt) and the cyclical
adjustments in the same period (ACt):
17
𝐵𝐶𝐴𝑡 = 𝐵𝐷𝑡 − 𝐴𝐶𝑡
Without going into details concerning the calculation of ACt, it is clear that it is
closely related to Codelco and the copper industry, as seen in the four
components considered: 1) Non-Mining Income Tax (ITNM); 2) pension
contributions of Health (ICS); 3) raw copper (CODELCO) (ICC); and 4) Income
Tax of the GMP10 (ITM) (DIPRES, 2015). Component 3 points directly to the
performance of CODELCO, 4 focuses on the industry as a whole, as the GMP10
is the set of the ten largest mining companies. Similarly, it emphasizes that in
the budget formulation process, the Ministry of Finance makes an explicit
distinction between mining and non-mining revenue.
Discussion: Is OECD-isation an alternative to CODELCO?
In the previous pages two questions regarding the Chilean public companies
have been addressed. On the one hand, it has been shown that CODELCO is a
strategic company for the national economy, not only for its importance as a
trigger of the economic growth but also for its relevance to fiscal policy.
Secondly, it has been shown that steps have been taken towards incorporating
the principles of the OECD regarding the management of public companies. In
fact, it is expected that the National Congress passes an initiative that explicitly
seeks to incorporate these criteria to the institutions. CODELCO already
partially advanced in that line in 2009. However, this progress has been relative,
as the authorities have understood that CODELCO requires special treatment
which has materialized, for example, in special forms of financing.
The presence of long-term benefits that are not captured by a private logic, and
that they can be explained not only in pure economic profits; but also in
contributing to state funding, a dynamic link with the private sector, and support
and development of an entire sector of small and medium enterprises, they are
threatened in a privatizing logic. Especially in the development of a state
company that operates in the extraction of a non-renewable natural resources.
CODELCO productive linkages is distributed and spread throughout the Chilean
economy. Hence good corporate governance ensuring transparency in the use of
resources to mitigate conflicts of interest in the property, and that is transparent
to society are an essential requirement of any good corporative government,
independent that this is a state or private enterprise. But given its strategic nature
and the presence of positive externalities not captured by a vision of self-
financing of a state enterprise of the relevance of CODELCO (as suggested by
the OECD) can lead to the detriment of the company and a loss of
competitiveness in international markets with the consequent negative effects on
18
their contribution to the public purse, and certainly, with undesirable effects on
macroeconomic balances which holds the Chilean economy.
The analysis of corporate governance of public companies using standard
models (theory of contracts, agency costs) partly reflects the reality behind these
companies (Castañeda, 2009, p. 21). The exogenous factors that are associated
with international markets rather than short-term decisions of the company
(fluctuations in the international price of copper), open space for fiscal action
that it is necessary to state enterprises in developing countries. The same need
for the State to safeguard income for the future, leading to a fiscal activism in
the co-financing of state enterprises. This certainly presents risks (political
capture, management inefficiencies, excessive consumption of non-monetary
benefits for senior management, agency costs) that are levied on the assets of the
company. But to the extent that these risks are administered and managed in a
clear and transparent manner, revealing that "no action" may be "more
expensive" in the future, it may be that the company decreases its value and
contribution to finance public spending.
There is no risk fiscal activism in financing public companies. But the risk of
not acting and not rush these funding challenges, especially in companies the
size and importance of Codelco, may involve greater long-term costs for
productive economic structure.
Here are some ideas as to why CODELCO should not adopt the scheme of the
OECD. Alternative ways are discussed.
In the “OECD Guidelines on Corporate Governance of State-owned
Enterprises” in Part I: “Ensuring an Effective Legal and Regulatory Framework
for State-Owned Enterprises” notes that:
"Should SOEs face competitive conditions regarding access to
financing. Their Relations with state-owned banks, state-owned
Financial Institutions and other state-owned companies Should be
based on purely commercial grounds".
From the theoretical point of view, this should work, especially if this is applied
to private companies operating in stock market transaction environments.
Developments in the share price and dividend payments are a source of constant
monitoring regarding decisions of firms ("market discipline"). Although there
are exogenous, external factors unrelated to the performance of the firm itself,
these indicators allow reducing the asymmetry of information regarding the
transparency of corporate decisions. But in the case of state-owned enterprises (SOEs) and not listed on the stock
exchange, as CODELCO (one of the biggest copper firms in the world), and
based on developing economies like Chile’s economy, the fact of applying those
OECD principles to treat them almost as they were a private company, would
leave the company strategically disadvantaged.
19
What are these principles in financial terms?
Overall, SOEs, according to OECD, should get their funding competitively. This
is without preferences or privileges of any kind. They also note that the
relationship of these SOEs with financial, state and non-state sector should be
based solely on commercial grounds.
The argument behind this definition is that the creditors and board assume the
existence of a "lender of last resort" (State) in the case of debts and credits of
SOEs. OECD notes that this could lead to excessive indebtedness, market
distortions, and this would be detrimental to the taxpayers and creditors. And all
this would leave a large space for opacity and conflicts of interest. Furthermore,
market discipline would not operate, and it will affect the incentive structure of
these companies.
OECD indicates in these Guidelines that it is necessary to make a clear
distinction between the state and responsibilities of SOEs in relation to creditors. The State could grant guarantees to SOEs to compensate for its inability to
provide them with equity capital. Besides, OECD guidelines, adds that SOEs
should be encouraged to seek financing from capital markets.
In the case of CODELCO, the situation is much more complex as it is described
by OECD Guidelines.
This is a firm that contributes to the State incomes from 2005 to 2014 with an
average of 2.8% of the GDP and in 2014 with approximately 1% of the GDP.
60% of total exports, and the sectoral GDP regarding mining sector is
approximately 13% of the GDP. If we apply the guidelines of OECD to
Codelco, this firm in the long term would be commercially non-viable.
CODELCO presents a great contribution to the Chilean economy, not only by
the aggregate figures, but also by its relevance in the development of mining
clusters in Chile.
Hence, the need to develop new structural projects (The most important of these
five years is to transform Chuquicamata mine open pit, the in the world’s
largest, into an underground mine, which is one of seven projects of these five
years amounting 23,000 MMUSD which requires a significant amount of
investment. Due to that by law CODELCO cannot leave out resources to invest
because apart from paying taxes, it must deliver all the profits to the state.
Therefore, CODELCO cannot capitalize the profits to invest in new businesses.
The estimated financial leverage of CODELCO (debt over equity) is two times,
and it is already in the limit of the contracts of debt (restrictive clauses), and the
access to allow issuing debt (bonds) in the international markets might become
constrained. Therefore, the needs of capital, to develop these structural projects
that ensure the viability of the company in the long term got more necessary and
important.
20
In this logic to analyse the company as an active generator of long-term
resources, the Chilean government announced in 2014 the capitalization of
US $ 4,000 million for Codelco in 2014-2018. From this, $ 3,000 billion
represents Treasury debt issuance. This means that the government, beyond the
possibilities of financing the company through issuance of debt or retained
earnings to capitalize the company, is committing itself to long-term structural
development of these mining projects.
And certainly the fall of copper’s price in the last year due to a deceleration of
China has accentuated this need of new capital to develop these investment
projects.
In this context, the Chilean State, and its government, in order to support this
company, key in the development of Chilean economy, in many aspects, decided
in 2014 to issue debts as State (as it was mentioned previously), in order to
facilitate these resources to Codelco. In any extent, state acted as a lender of last resort, due to inability of CODELCO
of issuing debt in significant amounts in international markets at reasonable
interest rates. Moreover, as state, gets proper spreads adjusted by risk country
(Chile owns one of the best indicators of risk country in emerging markets)6
which allows having a low financing cost.
The relevance issue, as is posed by OECD Guidelines, is that the new projects,
their assessment, accountability, and development on a timely basis, is that it
must be clear, transparent and consistent with the long term public policies
defined by the Chilean government.
However, if we apply the rule of self-finance to SOEs, without considering the
business cycle in which the economy is embodied and in this case, the mining
sector, could be the origin of declining and collapse of this company in the
future.
In the same line, given the nature of these new resources, these must be
managed and supervised in an open framework such that taxpayers, politicians,
among others, and access to public information about how these new projects
will be developed should be provided.
The political economy of SOEs, so relevant in the emerging economies, cannot
be under the same conditions that SOEs operating in developed economies. It
poses complexities that are not captured wholly in these OECD Guidelines, and
that require some adjustments, especially if these SOEs contribute in a
significant way to the state’s income.
6 Clasificación de riesgo de Chile: S&P (AA-); FITCH (A+); MOOD'S (Aa3).
21
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26
This yearly series of working papers (WP) aims to publish essentially
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Publications
2015/01 Stability in a Network Economy: The Role of Institutions
Robert P. GILLES, Emiliya A. LAZAROVA & Pieter H.M. RUYS
2015/02 L'économie sociale compte-t-elle ? Comment la compte-t-on ? Représentations de
l'économie sociale à travers les indicateurs statistiques
Amélie ARTIS, Marie J. BOUCHARD & Damien ROUSSELIÈRE
2015/03 Cadre conceptuel de qualification des entités de l'économie sociale dans les statistiques
Marie J. BOUCHARD, Paulo CRUZ FILHO & Martin ST-DENIS
2015/04 La construction de la statistique de l'économie sociale et solidaire (ESS) en France :
une mobilisation progressive d'acteurs très divers
Danièle DEMOUTIER, Elisa BRALEY, Thomas GUÉRIN & Daniel RAULT
2015/05 Que « produit » l’entreprise d’économie sociale ?
Sybille MERTENS & Michel MARÉE
2015/06 Organizational models for the major agri-food cooperative groups in the European
Union
Elena MELIÁ MARTÍ & Ma Pía CARNICER ANDRÉS
2015/07 Rough Guide to the Impact of the Crisis on the Third Sector in Europe
Tony VENABLES
2015/08 State-Owned Banks: Acquirers in M&A deals
Emanuele BACCHIOCCHI, Matteo FERRARI, Massimo FLORIO &
Daniela VANDONE
2015/09 Major Public Enterprises in Croatia
Anto BAJO & Marko PRIMORAC
2015/10 Major Public Enterprises in Germany
Christina SCHAEFER & Stephanie WARM
2015/11 Credit Unions in Romania – a strong social enterprise model to combat financial
exclusion and over indebtedness
Cristina BARNA & Ancuţa VAMEşU
2015/12 Overcoming urban-rural imbalances: the role of cooperatives and social enterprises
Andrea SALUSTRI, Michele MOSCA & Federica VIGANÒ
2015/13 Worker cooperatives, a status to survive in a changing world or a status to change the
world? Spain and France, two worldviews on worker cooperatives
Sandrine STERVINOU, Julie BAYLE-CORDIER, Lorea NARVAIZA,
Cristina ARAGON, Cristina ITURRIOZ
2015/14 Municipalities and Social Economy. Lessons from Portugal
João Salazar LEITE
2015/15 Financial vulnerability: an empirical study of Ugandan NGOs
Berta SILVA & Ronelle BURGER
2015/16 Revisiting the concept of Social Enterprise in a Gulf Cooperation Council (GCC)
context: a social constructionist view
Sarah JOHNSEN
2015/17 Major Public Enterprises in Turkey: 2005-2013
S. Burcu AVCI
2015/18 Is the OECD Model Suitable for Strategic Public Enterprises in Terms of
National Development? Reflections from CODELCO Case, Chile
Francisco CASTAÑEDA, Diego BARRIA & Germán ASTORGA
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